You were approved for $10,000 in credit, so why can’t you use it? You can, but understand that using too much of that available credit can lower your scores. That’s not a big problem, as long as you don’t anticipate opening a new credit account anytime soon.
| “Proportion of Balances to Credit Limits is Too High” | Credit Score Risk Factor Codes |
| Equifax | 10 |
| Experian | 10 |
| TransUnion | 10 |
| NextGen | P5 |
If you have been told recently that your balances are too close to your credit limits, it is an indication that your lenders are concerned that you might be overextending yourself. It is not healthy to carry balances on too many accounts. Similarly, it is not advisable to use too much of your available credit on a single account.
Maxing out your credit cards is a dangerous situation. It means that you are teetering on the edge of a cliff. Over-the-limit fees can add to your required minimum payment, thereby increasing the chance that you will be unable to make your payment.
Even if you are no where near your credit limits, you may still lose points on your credit scores due to using too much of your available credit. Credit bureaus calculate a ratio of your debt balances in relation to your available credit. This is known as your credit utilization rate. Ideally, you should be using no more than 10% of your available credit.
Many financial experts will say that you can safely use up to 30% of your credit limits without any problems. According to Fair Isaac spokesperson Craig Watts, exceeding even 10% of your credit limits will begin to cost you precious points on your credit score.
Even if you pay your account off in full every month, your credit scores may drop when credit accounts report the higher balance. Of course, your scores will rebound whenever they report a zero balance.
If you have been denied new credit because your balances are too high compared to your credit limits, then you may need to seriously reconsider your financial situation. When a prospective lender is telling you that you are getting overextended, then the last thing you need is yet another credit account.
Instead, you need to examine your situation to see what can be done to lower your existing balances. If you are indeed already overextended, it is time to talk with a financial counselor to develop an action plan for getting out of debt. Otherwise, you are on a fast track to bankruptcy.
Proportion of balances to credit limits is too high on bank revolving or other revolving accounts is Code 10 on FICO-based credit scoring products. It is NextGen score Code P5.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
Favorite quote:
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."
Thomas Jefferson
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